A Few Notes on Price Fixing

The recent posts on MSRP, MAP, and Prestige Pricing got me thinking a bit (and some of you pinged me about this too) – it is amazing just how close to *illegal* the more aggressive strategies (such as MAP) are. To take a bit of a break from the “Retail Strategy Secrets” series, I thought it might be fun to explore a bit more background on price fixing and fair trade.

Don’t worry, no legalese here, just some nice examples and a bit of history. Then we’ll get right back to more retail pricing strategies right away with the next post. At the very least, you’ll now when you could call in the Feds on a sneaky retailer! 🙂

Let’s start with an example (details modified to “protect the innocent”)…

A complaint alleging Price Fixing was sent into the U.S. Attorney General’s Consumer Protection Division. In this particular case, a consumer noticed that a certain home theater stereo system was priced at exactly $297.23, regardless of where it was found. In the mall, at a discount retailer, at an upscale electronics boutique, and every website that could be googled. Further, one of the managers he spoke to about the common price (when asking for a discount so the store could earn his business) responded that it could not be sold at a lower price. Why? Because it would have been below the manufacturer’s suggested retail price (MSRP).

In this case, the selling price was the same everywhere. A blatant case of price fixing! MSRP and related practices are supposed to help standardize prices in the interest of fair trade. Further, they should prevent small business from being taken advantage of, not the other way around.

Not so fast, though – our example is also a shining example of fair trade! What?!?! How could it be both?

Well, nowhere was it stated just how any entity was forcing the behavior of the less powerful or unsuspecting, or that an agreement was reached to set a price. The details that were left out (hey, I even put a disclaimer before the example! 🙂 ) were not the names of the establishments, or even if accuser was an individual or privileged organization.

Rather, the key points that are needed to lock down the legality of MSRP (or Vendor Pricing strategies in general) are two words that begin with the letter “C”. Collusion and Coercion.

Collusion is defined as an agreement reached between two (or more) parties that would otherwise appear as adversaries to each other. This can occur in written form (contract) or by verbal agreement if either can be proven. Illegal agreements to set prices are investigated between multiple manufacturers, multiple retailers, and even between the two.

Coercion is the act of threatening (or employing) force to modify the behavior of another or otherwise achieve compliance. While a manufacturer may suggest a retail price and impose penalties against retailers *in general* for using too much discretion, it cannot express that the sole option at retail is a specific set price. Nor can it maliciously single out specific retailers for harsh penalties.

Instead, A manufacturer is generally limited to setting an example retail price (a manufacturer’s suggested retail price or MSRP), and establishing a set of penalties that apply evenly/fairly to the marketplace. Then, if things get too out of hand, they reserve the ability to impose such penalties on retailers not abiding by the guidelines.

As you can imagine, there is quite a bit of gray area and rulings rely heavily on precedent. In fact, it used to be that the United States would *allow* fixed prices to be imposed under “Fair Trade” statutes. This was later reversed when cases were brought forward and judged to restrain free trade.

As such, contracts are very carefully worded and reviewed by corporate legal teams to prevent and avoid even hints of collusion. The basic rule of thumb is: if the pricing decisions of the manfuacturer/vendor and retailer are clearly independent of each other, then it is likely not a case of price fixing under the law. However, any agreement – implied or written – between manufacturer/vendor and retailer for charging a certain price can invite scrutiny and could be considered illegal.

Returning to our example at the beginning of the post, the verdict would in all likelihood turn out to be fair practice unless specific evidence to the contrary could be introduced. Nomatter how odd this particular pricing “pattern” would seem, identical prices across storefronts are most frequently the individual decision of each retailer to adhere to MSRP.

For more information, visit the Wikipedia article “Suggested Retail Price”. I did to help write this post – I’m not a lawyer (and thank goodness). If you see something in here that can be fine tuned, feel free to comment and I’ll fix it!